Question

Hi-Tek Manufacturing, Inc., makes two types of industrial component parts—the B300 and the T500. An absorption costing income statement for the most recent period is shown:

Hi-Tek Manufacturing Inc. Income Statement
Sales	$	1,705,300
Cost of goods sold		1,242,356
Gross margin		462,944
Selling and administrative expenses		600,000
Net operating loss	$	(137,056	)

Hi-Tek produced and sold 60,500 units of B300 at a price of $20 per unit and 12,700 units of T500 at a price of $39 per unit. The company’s traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company’s two product lines is shown below:

	B300		T500		Total
Direct materials	$	400,900	$	162,800	$	563,700
Direct labor	$	120,200	$	42,800		163,000
Manufacturing overhead						515,656
Cost of goods sold					$	1,242,356

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $54,000 and $103,000 of the company’s advertising expenses could be directly traced to B300 and T500, respectively. The remainder of the selling and administrative expenses was organization-sustaining in nature. The ABC team also distributed the company’s manufacturing overhead to four activities as shown below:

	Manufacturing Overhead			Activity
Activity Cost Pool (and Activity Measure)				B300	T500	Total
Machining (machine-hours)	$	201,036		90,100	62,200	152,300
Setups (setup hours)		153,120		78	270	348
Product-sustaining (number of products)		101,400		1	1	2
Other (organization-sustaining costs)		60,100		NA	NA	NA
Total manufacturing overhead cost	$	515,656

Required:

1. Compute the product margins for the B300 and T500 under the company’s traditional costing system.

2. Compute the product margins for B300 and T500 under the activity-based costing system.

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.

Compute the product margins for the B300 and T500 under the company’s traditional costing system. (Round your intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.)

	B300 T500 Total Product margin $0

Compute the product margins for B300 and T500 under the activity-based costing system. (Negative product margins should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places.)

	B300 T500 Total Product margin $0

Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places and "Percentage" answers to 1 decimal place and and other answers to the nearest whole dollar amounts.)

	B300 T500 Total % of % of Amount Amount Amount Traditional Cost System % % % % % % Total cost assigned to products $0 $0 $0 Total cost $0 B300 T500 Total % of % of Amount Total Amount Amount Total Amount Amount Activity-Based Costing System Direct costs: % % % % % % Indirect costs: % % % % % % Total cost assigned to products $0 $0 0 Costs not assigned to products: Total cost $0

Answer 1

PRODUCT MARING UNDER TRADITIONAL COSTING SYSTEM:
	B300	T500	Total
Product margin	$       308,647	$    154,302	$     462,950
	B300	T500	Total
Product margin	$       430,948	$     (64,904)	$     366,044
WORKINGS:
TRADITIONAL COSTING SYSTEM:
Pre-determined OH allocation rate = 515656/163000 =			316.35%
.	B300	T500	Total
Direct materials	$         400,900	$      162,800	$       563,700
Direct labor	$         120,200	$        42,800	$       163,000
Manufacturing overhead-Allocated (316.35% of Direct Labor Cost)	$         380,253	$      135,398	$       515,651
Cost of goods sold	$         901,353	$      340,998	$    1,242,351
Number of units	60500	12700
Cost per unit	$                 14.90	$             26.85
Sales price per unit	$                 20.00	$             39.00
Sales revenue	$         1,210,000	$         495,300
ABC SYSTEM:
ALLOCATION OF OVEHEAD:
CALCULATION OF ACTIVITY RATES:
		Activity
Activity Cost Pool (and Activity Measure)	Manufacturing Overhead	B300	T500	Total	Activity Rate
Machining (machine-hours)	201,036	90,100	62,200	152,300	$               1.32
Setups (setup hours)	153,120	78	270	348	$          440.00
Product-sustaining (number of products)	101,400	1	1	2	$    50,700.00
Other (organization-sustaining costs)	60,100	NA	NA	NA
Total manufacturing overhead cost	515,656
COST OF SALES UNDER ABC:
.	B300	T500	Total
Direct materials	$         400,900	$      162,800	$       563,700
Direct labor	$         120,200	$        42,800	$       163,000
Manufacturing overhead-Allocated:
Machining (machine-hours)	$         118,932	$        82,104	$       201,036
Setups (setup hours)	$           34,320	$      118,800	$       153,120
Product-sustaining (number of products)	$           50,700	$        50,700	$       101,400
Manufacturing overhead-Allocated	$         203,952	$      251,604	$       455,556
Advertising-Traceable	$           54,000	$      103,000	$       157,000
Cost of sales under ABC	$         779,052	$      560,204	$    1,339,256
Number of units	60500	12700
Cost per unit	$                 12.88	$             44.11
Sales price per unit	$                 20.00	$             39.00
Sales revenue	$         1,210,000	$         495,300	$      1,705,300
QUANTITATIVE COMPARISON:
	B300			T500			Total
		% of			% of
	Amount			Amount			Amount
Traditional Cost System
Direct materials	$         400,900	44.48%	%	$       162,800	47.74%	%	$        563,700
Direct labor	$         120,200	13.34%	%	$         42,800	12.55%	%	$        163,000
Manufacturing overhead-Allocated	$         380,253	42.19%	%	$       135,398	39.71%	%	$        515,651
Total cost assigned to products	$         901,353	100.00%		$       340,998	100.00%		$     1,242,351
Selling and administrative expenses							$      600,000
Total cost							$   1,842,351
	B300			T500			Total
		% of			% of
	Amount	Total Amount		Amount	Total Amount		Amount
Activity-Based Costing System
Direct costs:
Direct materials	$         400,900	51.46%	%	$       162,800	29.06%	%	$        563,700
Direct labor	$         120,200	15.43%	%	$         42,800	7.64%	%	$        163,000
Total direct costs	$       521,100	66.89%	%	$     205,600	36.70%	%	$      726,700
Indirect costs:		0.00%			0.00%
Machining (machine-hours)	$         118,932	15.27%	%	$         82,104	14.66%	%	$      201,036
Setups (setup hours)	$           34,320	4.41%	%	$       118,800	21.21%	%	$      153,120
Product-sustaining (number of products)	$           50,700	6.51%	%	$         50,700	9.05%	%	$      101,400
Advertising costs	$           54,000	6.93%		$       103,000	18.39%		$      157,000
Total cost assigned to products	$         779,052	100.00%		$     560,204	100.00%		$   1,339,256
Costs not assigned to products:
Other organization sustaining costs							60,100
Selling and administration = 600000-157000 =							443,000
Total cost							$   1,842,356